Tesla (TSLA) raising funds

Last week TSLA announced that it is raising $1 billion in new capital, $750 million in convertible notes due in 2022 + $250 million in common stock.

The offering itself isn’t a surprise. TSLA has been chronically in the situation where analysts can see a point on the near-term future where the company could easily run out of funds. This is partly the lot of any startup. In TSLA’s case, it’s also a function of the firms continuingly expanding ambitions. Elon Musk has been saying for some time that TSLA will will need new capital, too.

What is surprising, to me at least, is that the offering is not bigger …and, more significantly, that the stock went up on the announcement.

To the first point, why wouldn’t TSLA give itself some breathing room by raising more money? Of course, it’s possible that the small size is a marketing tactic and that the underwriters will soon announce that, “due to overwhelming demand,” it’s raising the size of the offering to, say, $1.5 billion. Otherwise, I don’t get it.

To the second, this is just weird. TSLA shares rose by a tad less than 30% in the first six weeks of 2017 and have been moving more or less sideways since. So the idea that investors are willingto buy the stock can’t be surprising positive news. And I don’t see the plus in some commentators’ claims that the market is relieved the offering isn’t larger. I think the market should be mildly concerned instead.

Something else must be going on.

The only thing I can think of is that Wall Street is beginning to believe that electric vehicles are going to enter the mainstream much sooner than it had previously thought. At the same time, the Trump administration’s intended moves to make it easier for American car makers to sell gas guzzlers for longer may result in Detroit remaining stuck in the past, paying less attention to electric vehicles. So market prospects for TSLA may be improving just as competition from the “Big Three” may be weakening.

However, that alone shouldn’t be enough to propel a well-known stock higher in advance of an offering.

Thanks for your comment. Typically, when an already publicly traded company announces a new offering of stock, the price declines a bit.

Two related reasons: underwriters typically price the offering at a slight discount to the prevailing market price, to induce investors to buy all at once rather than over time during regular trading. Knowing this, arbitrageurs typically begin to sell the stock short on the announcement, thinking they can cover their negative bets by buying stock in the offering.

In the Tesla case, the offering was so well signaled in advance that arguably the arbitrage process I just described had already begun, so nothing should have happened.

But the stock went up instead–which is not what I would have expected.

Why should that be?

One reason could be that the market doubted that Tesla would be able to get an offer off in the first place. If so, the announcement itself (which never would have been made if the underwriters didn’t have firm indications of interest) might be seen as a positive surprise, making the stock go up. But I don’t think that can be true, since investors have had a strong recent appetite for TSLA, pushing the stock up pretty steadily since the beginning of the year.

Maybe the surprise was the small size of the offering. But I don’t think that’s right, either. It’s possible, but unlikely, in my view, that the underwriters thought this was as much money as they could raise. If investors thought that, however, the stock would have plunged, I think. Personally, I would have preferred that Tesla raise more money than this, if nothing else so that the running-out-of-cash question could have been put to bed for a longer time.